Claims about China

Charles Brown CharlesB at
Mon Aug 23 14:51:42 MDT 1999

   China's competitive transition pushing state industries away

   Copyright © 1999 Nando Media
   Copyright © 1999 Associated Press


   BEIJING (August 22, 1999 12:27 p.m. EDT -
   Big screen color TVs sell for $150. Washing machines go for $100.
   Men's and women's shirts are $2.50. Prices have never been lower at
   Beijing's Landao Department Store. But that seems to be the problem.

   China is struggling to transform state-run factories into competitive
   industries but its markets remain glutted with consumer goods.
   Producers already deeply in debt are bankrupting each other with
   fierce price wars instead of adjusting to market demand.

   Fearing that the deflationary debt spiral will worsen unemployment and
   ignite social unrest, the government announced a ban last week on
   investment in production of a wide array of consumer goods.

   Meanwhile, President Jiang Zemin is visiting one factory after
   another, exhorting all to do their best to reinvigorate state

   "The good performance of state enterprises is not only a major
   economic issue ... but also a major political issue affecting the fate
   of the socialist system," Jiang said in a recent speech during a trip
   to the industrial northeast.

   His campaign to reboot the economy seems, however, to be making little
   headway in weaning state industries from their reliance on state
   subsidies and protection.

   "They have gotten to the point where the easy stuff has been done and
   they are running into economic, political, financial and social
   constraints," said Ken Courtis, regional economist for Deutsche Bank
   Capital Markets (Asia).

   Prices in the saturated consumer market have been falling since
   October 1997. Regulators imposed minimum prices for TV sets and some
   other items, but instead of cutting production, state factories
   churned out even more. As prices drop, losses are mounting, driving
   manufacturers ever deeper into debt.

   Many products may be the cheapest ever, after adjusting for inflation,
   but consumers aren't buying. With factories laying off workers by the
   millions each year, people worried about losing their jobs are
   stashing their money away.

   In addition, the Asian economic crisis and slower world growth have
   cut Chinese exports and reduced foreign investment. Massive public
   works spending, repeated interest rate cuts and other tinkering
   haven't spurred consumer buying. Now the government spending boom is

   Despite the sense of crisis, President Jiang and other leaders seem to
   lack the political will to starve inefficient state enterprises and
   nurture the fast-growing private sector.

   Instead, they are resorting to a mishmash of government mandates that
   may help alleviate the symptoms of China's industrial malaise but are
   unlikely to cure it.

   Production of television tubes was suspended for two to three weeks in
   early summer. Investment in factories to produce TV sets, air
   conditioners, refrigerators, plastic bags, bicycles, microwave ovens,
   candy, salt, apple juice, liquor and other items will halt Sept. 1. To
   counter a real estate glut, officials will withhold permits for new
   luxury apartments, hotels and office buildings.

   The government announced recently it will raise pay for civil servants
   by 30 percent to 40 percent, apparently in hopes of discouraging
   corruption and encouraging more consumer spending. To compel the
   thrifty to spend more, it reportedly plans to tax the interest on

   Yet, while the economy sags, government bureaucrats and
   state-enterprise managers are tied up with a Maoist-style political
   campaign intended to purge those judged to be corrupt or disloyal.

   Officials say they have lost weeks of work time to Jiang's "three
   stresses" campaign, which is emphasizing theoretical study, political
   consciousness and "healthy" trends.

   Another campaign, against the banned Falun Gong meditation sect, also
   has eaten up valuable time.

   Courtis, the Deutsche Bank economist, says that little will change as
   long as leaders fail to enforce a wholesale overhaul of industrial
   management and to create financial markets to channel credit to the
   economy's most dynamic sectors.

   "Money is going only to those who know how to destroy capital. They
   can keep pulling all the levers, but until that basic mechanism
   changes, the economy won't recover," he said.

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